What Is Severance Pay? A Guide for HR During Layoffs

What Is Severance Pay?

Layoffs are never an ideal situation, but they’re often a necessary evil that companies must take for their financial stability. For those employees who are let go, a severance package can provide some cushion to help them find new jobs. But what exactly is severance pay, and how does it work?

Unlike vacation and sick days, severance packages are not guaranteed benefits for all workers. Instead, they’re determined by company policy or an employment contract. Generally, those who are ranked higher in the corporate hierarchy or have been employed for longer periods of time will receive more severance than others. The total amount of severance pay will also depend on the state in which you live. For more personalized information, you should contact your local unemployment insurance agency to learn how severance payments can impact your eligibility for unemployment benefits.

Severance pay is sometimes referred to as a retiring allowance, termination pay or severance bonus. Regardless of what it’s called, this compensation is taxable income just like any other paycheck. For this reason, it’s important to factor in state and federal income tax withholding when calculating the amount of severance you can expect to receive.

What Is Severance Pay? A Guide for HR During Layoffs

In addition to severance pay, some companies may offer outplacement services to help their departing employees find new roles. This may include career counseling, interview coaching and resume review. If the company provides this service, it should document it in a written agreement and include the costs in the severance package.

While severance packages can vary by industry and company, they typically consist of salary through the date of termination plus any unpaid bonuses and other compensation. Some states, such as California, require that performance-based bonuses be paid out in full to employees who are laid off. However, most employers choose to prorate these bonuses and not pay out the entire amount at the time of termination.

Employers are not required to provide severance pay to departing workers, though many choose to do so in order to establish a more positive relationship with their former colleagues and protect themselves from lawsuits. Companies that don’t provide severance packages risk a loss of brand loyalty, negative media coverage and potential legal claims from laid-off workers who are unable to find new jobs.

HR teams need to follow best practices in delivering the news that they’re letting employees go. For example, HR should schedule private meetings for each employee to discuss the details in person. If factors such as a large workforce or remote work make face-to-face meetings challenging, consider hosting video conference calls. Whether in-person or via video, it’s essential to be honest and compassionate when explaining the company’s decision.

For those who are over 40, severance agreements must be in writing and meet additional requirements in order to comply with the Older Workers Benefit Protection Act. This includes a waiver that advises the employee to consult an attorney before signing, and allowing them seven days to revoke their signature.